MoonTalk: Sovereign Debt – Just Take The Punch?

The chief executive of the worlds biggest bond fund Pimco, Mr. Mohamed El-Erian, presents a six-point-analysis on how to deal with the sovereign debt problem. His conclusion is that we should expect – rather than be surprised by – damaging recognition lags in both the public and private sectors.

“Playbooks are not readily available when it comes to new systemic themes.”

Mohamed El-Erian

We should expect – rather than be surprised by – damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena, Mr. El-Erian writes in a post, published in The Financial Times this week.

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognized for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects.

Countries will thus be forced to make difficult decisions relating to higher taxation and lower spending. If these do not materialize on a timely basis, the universe of likely outcomes will expand to include inflating out of excessive debt and, in the extreme, default and confiscation.

So, what do you think?

Should we just take the punch and get over it?

MoonTalk: Sovereign Debt – Just Take The Punch?

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